US vs China: How Can America Win?

The technology competition between the US and China is often framed as a race where China is trying to catch up, while the US is trying to maintain its lead by using tools, like export control, to keep China behind.

For the first time (and in a coherent, constructive, non-fear-mongering way), the Special Competitive Studies Project (SCSP) via its first major report articulated a view where the US, not China, is the one losing and needs to catch up. It is a refreshingly honest take of what’s happening now and what lays ahead.

The SCSP is led by Eric Schmidt (ex-CEO of Google and Novell) and fashioned itself after the Special Studies Project, a similarly purposed organization led by Henry Kissinger in the 1950s. While the SCSP is a non-profit, not a government policymaking body, it seems to have the “ears” of a bipartisan group of government officials. During its day-long event in Washington, DC last week, dubbed the “Global Emerging Technology Summit”, to launch its report, senators from both parties and a string of senior Biden administration officials spoke to offer support.

As any DC event would go, the presence of senior officials and luminaries (like Kissinger) tend to grab all the attention. But what I found most interesting and useful has nothing to do with the words of high-profile people. Here are my initial reactions and takeaways of both the Summit event and the report itself.

Losing Is An (Winning) Option

Arguably the most useful output is the SCSP’s willingness to “pop the bubble” on American pride when it comes to China. In a Foreign Affairs article by Schimt and Yll Bajraktari (executive director of SCSP), teasing the release of the report, “Losing is an option” is literally the first subsection of the article.

It is a more healthy, grounded, albeit less crowd-pleasing attitude than “murica is #1”, which is fun to yell at a July 4th BBQ, but does not get us anywhere. Whether you are a country, a company, a hedge fund, a sports team, or any group that operates in a competitive situation, you cannot win if you don’t think you can lose.

Knowing that “losing” is an option, if not a distinctly probable outcome, is an integral part of “winning”.

China’s rise has been fueled by its own losing, which lasted for more than a century following multiple centuries of dominance and arrogance beforehand. That shame, insecurity, and forced humility is still what motivates China’s growing competitiveness today, though arrogance is creeping back in with things like “wolf warrior diplomacy”.

In fact, China’s own fall and rise is the perfect cautionary tale for the US. Right now, the US is still long on self-congratulatory pride, short on introspective humility. In his closing remarks at the SCSP event, Schmidt tried his best to “pop the bubble” without making the room feel too awkward. After giving an obligatory praise to the passage of the CHIPS Act, he told his audience that the US’s competitor (read: China) is doing the same “every week in one form or another”.

Even with the CHIPS Act and its headline $50 billion subsidy to support the domestic semiconductor industry, the US is still losing! That deficit is compounded by the reality that once you read the fine prints of the legislation (which I did), you will discover that the real amount is closer to $39.2 billion spread over five years.

If America wants to win, it needs to recognize that it can lose. And the tenor of the SCSP’s report and event is nudging that uncomfortable but necessary recognition along.

How Will America Win?

Assuming America can develop a more honest, less delusional attitude before it is too late, there is a long, daunting list of things it needs to do to actually win, as Schimdt and Bajraktari’s article called out. As with any long to-do list, it is always a good idea to start somewhere to make progress, get help, and gain some confidence, in order to rally more support for the rest of the to-do list.

Here’s how I would begin approaching the SCSP’s massive to-do list for America.

Get Outside Help: South Korea, Taiwan, Israel

America should start by getting “outside help” and feel comfortable emulating elements of industrial policies from allies who’ve done a good job. There is no shame in “copying”. From the agenda of the SCSP’s event, we can glean some hints as to which allies want to help, if America can put its pride aside to learn.

South Korea, Taiwan, and Israel were the three featured foreign governments, who sent senior-level officials to the Summit to offer support. Even though all three official messages were pre-recorded and the content was nothing remarkable, as one would expect, these three allies all have successful track records of implementing industrial policies and punching way above their weight.

Through decades of trial and error, South Korea has managed to boast not just two of the top makers of semiconductors (Samsung and SK Hynix), but also of smartphones, cars, and batteries that go into electric vehicles. Furthermore, these South Korean conglomerates have invested billions of dollars in building manufacturing and R&D facilities all over the US with plans for more. The US can accelerate its own “catching up” by supporting South Korean investments to make sure they are successful and learn from their operational and technical best practices.

Similarly, there are lots of lessons to absorb from the experience of Taiwan and its semiconductor crown jewel, TSMC. Luring TSMC to build new fabs in Arizona is one thing. But on a more strategic level, America should seriously study how the Taiwanese government gave early support for TSMC to get it off the ground – pumping 48% of the needed investment when no one wanted to invest. Learning more from luminaries like TSMC founder Morris Chang would also help; even in his 90s, Chang is articulate, wise, and willing to share, as long as America is willing to listen.

While I’m not as familiar with Israel’s industrial policies as I am of South Korea’s or Taiwan’s, it is a well-known fact in tech that Israel produces some of the best technical talent and deep tech startups, especially in the realm of cybersecurity and infrastructure technology. The Israeli Defense Force, particularly its signals intelligence group Unit 8200, has become a factory of tech entrepreneurs, whose alumnus’ companies rival that of YC.

There is something that America can learn from each of these allies. Better yet, they are willing, if not eager, to help. Why not leverage these partnerships to accelerate progress?

Focus on Frontier Technologies:

One of my favorite parts of the SCSP’s almost 200-page report is Chapter 7, where it lists the six frontier technologies that will shape global competitiveness for the rest of the 21st century:

• AI (particularly GPT-3)
• Compute (specifically quantum)
• Networks (especially cables for 6G)
• Biotechnology (specifically in combination with AI)
• Energy generation and storage (particularly nuclear fission and future)
• Smart manufacturing (especially biomanufacturing)

Even though some of these categories sound like “pie in the sky” concepts, focusing on them now, not later, taps into America’s strengths as a rich economy with vast resources in land, people, money, and thus the capacity to push boundaries of innovation that small countries, like South Korea or Israel, would seldom dare to try.

In my view, America is a bit too obsessed over semiconductors, which is frankly a mature technology of the last century. Instead, issuing a national rallying cry to tackle these frontier technologies – all of which will need more semiconductors anyways – is how America can mobilize its resources and attract talent globally in a way only America can, through inspiration plus immigration. Otherwise, it will suffer from the “big nation version” of the Innovator’s Dilemma.

After more than a century of foreign invasions, civil wars, and “losing”, the so-called Modern China is effectively a 40-plus-year-old startup that began in 1978 with Deng Xiaoping’s “opening and reform”. In my view, the various policy and regulatory crackdowns that China has been implementing in the last few years is simply the “China startup” trying to clean up its startup debt, which every startup accumulates over time.

America is arguably a 240-plus-year-old startup, with its fair share of “startup debt” to clean. However, given its runaway success, it is operating more like an incumbent. If America really wants to win, it needs to function more like a startup. And to do so, it will need to focus on the frontier – the future – right now.

(Disclaimer: a few months ago, members of the SCSP research staff reached out to me for my opinion on a variety of topics related to US-China. So, technically, I played a tiny part in contributing to the report and was recognized as such. I found the research staff open-minded, genuine, and intellectually curious, and I very much enjoyed my interaction to support their efforts.)